Opendoor Technologies (OPEN +4.40%) and Redfin (RDFN +0.00%) are cut from the same cloth in many ways. Both are real estate tech stocks aiming to disrupt the massive real estate industry. They have a lot of exposure to the housing market, which has sunk both stocks in the post-pandemic slump.
As the chart below shows, Opendoor and Redfin are both down sharply from their previous peaks.
Both stocks are down roughly 90% from their pandemic-era peaks, but as investors look forward to interest rate cuts, expected to begin in September, Redfin and Opendoor are suddenly popping.
As of Aug. 27, Redfin was up 75% from where it closed on Aug. 7, while Opendoor is up 49% in the same timeframe.
Those rallies make sense. Investors now widely expect the Federal Reserve to cut benchmark interest rates in September, especially after Jerome Powell's comments last week. Lower mortgage rates should help revive the struggling housing market, boosting Opendoor and Redfin.
But if you're trying to choose between these two stocks, which is the better one to buy today? Let's take a look to see who comes out on top.
Image source: Getty Images.
Opendoor vs. Redfin: business model
Though Opendoor and Redfin position themselves as tech-forward real estate disruptors, they operate with different business models. Opendoor is essentially a home flipper. The company seeks to purchase homes and resell them for a higher value after making modest repairs or improvements that, in addition to a 5% service fee, it typically charges the seller.
Opendoor aims to disrupt the housing market by presenting a form of home-selling that it believes is easier and more efficient than the traditional route. By selling to Opendoor, a seller can avoid finding an agent, preparing the home for showings, hosting visits, waiting for offers, and negotiating over repairs, as well as the risk that the seller will back out.
Redfin, on the other hand, functions as an online real estate brokerage. The company charges most home sellers a commission of 1%-1.5%, compared to traditional brokerages' 2.5%-3% standard rate. However, that could change after the National Association of Realtors (NAR) settlement.
In addition to the traditional brokerage business, the company offers rentals, mortgages, and title services in an effort to be a one-stop shop for prospective homebuyers. Redfin previously had a home-flipping business similar to Opendoor, called Redfin Now, but it shuttered it in 2022 as it was losing money and found it too hard to predict prices accurately.
NASDAQ: OPEN
Key Data Points
Opendoor vs. Redfin: financials
Both Redfin and Opendoor have been historically unprofitable, especially amid the challenges in the housing market. Redfin was briefly profitable on an operating income basis during the pandemic, while Opendoor has never been operating-income profitable since it went public, though it came close in 2022 before mortgage rates started to rise.
In its most recent quarter, Opendoor reported a gross profit of $129 million on $1.51 billion in revenue and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $5 million. Opendoor's numbers had improved substantially from the quarter a year ago as the company cleared its overpriced inventory.
Redfin's revenue rose 7% to $295.2 million in the second quarter, and its gross profit was up 9% to $109.6 million. It also reported flat adjusted EBITDA, up from a loss of $6.9 million in the second quarter.
NASDAQ: RDFN
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Opendoor vs. Redfin: valuation
Valuing the two companies is difficult because they aren't profitable. Revenue is also a poor metric to use with Opendoor because its revenue is essentially pass-through income from the sales of the homes it purchases. It can easily generate unprofitable revenue.
Perhaps the best way to compare the two companies on valuation is by using gross profit. The two companies have similar valuations, with Opendoor trading at 4.1 times gross profit while Redfin is valued at 3.9. The difference is negligible.
Opendoor vs. Redfin: Which is the better buy?
As you can see from the comparisons, the two stocks have a lot in common, including similar valuations, financial challenges, and disruptive-yet-unproven business models in the real estate industry.
Of the two companies, Redfin seems to have a slight edge right now. The brokerage model is profitable in a healthy real estate environment, and Redfin could benefit from the NAR settlement, which could encourage more agents frustrated with what could be lower commissions from traditional brokerages to work with Redfin.
Redfin also seems better positioned to capitalize on lower rates as that seems likely to bring homebuyers back into the market and drive a rebound in housing inventory for sale. Opendoor is more reliant on home prices rising, but that may be more difficult since they are already at all-time highs.
Between the two, Redfin looks like the better way to play the real estate recovery, but investors looking for a range of options wouldn't be remiss to buy shares of Opendoor. Both stocks have a lot of upside potential as the housing market comes back to life.
